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On matters of optimism and pessimism

by Robert Teitelman | Published February 22, 2012 at 11:49 AM

We're at a strange moment, trembling between optimism and pessimism. Much of this is economic; after a gloomy four years or so, there are signs that a more solid economic recovery may be in the works. But then there are gas prices. And Greece. And Iran. And the banks and the mortgages. And inequality. And, if you like, the Mayan calendar. It's difficult to shake the willies brought on by the great mortgage collapse and all that followed. It's difficult to see the entire forest when you're up a tree deep within it. It's particularly difficult to make a judgment because we are rooted in today -- and we've learned, to our abiding distress, not to trust our feelings on these matters, certainly not to trust any sense of euphoria or even hope. And then, of course, the land resounds to the sound of podium-pounding politicians and cranks who see apocalypse and moral decline in every falling tree and in every burning bush.

How difficult is this problem? Consider the stagnation thesis, an argument made by George Mason economist Tyler Cowen that the primary cause of much of what ails us economically -- from overleveraged households to deficit-ridden governments to inequality -- is a deceleration of technological advance that he traces back to at least the '70s: or, as he titled the book he wrote on the subject, "The Great Stagnation." This week, The American Interest posted an interview conducted by Francis Fukuyama with venture capitalist, tech entrepreneur (PayPal) and libertarian Peter Thiel. Cowen dedicated "The Great Stagnation" to Thiel, and Fukuyama describes him as "one of the inspirations" for that book, whatever that means. Thiel doesn't argue with that characterization and goes on to enthusiastically summarize the argument. "I think the question of technological dynamism isn't often examined, but when you look into it you see many problems, from transportation failures to the space program and the Concorde decommissioning to how the energy failure allows oil price shocks to undo the price improvements of the previous century. Think of the famous 1980 Paul Ehrlich-Julian Simon wager about resource scarcity. Simon may have won the bet a decade later, but since 1993, on a rolling decade basis, Ehrlich has been winning famously. This is something that has not registered with the political class at all."

This leads Fukuyama to suggest that this may represent an early sign of a zero-sum world (read Malthusian) and that the result of so much technological change tends to favor the smart and well educated. Thiel denies he ever said there had been "no technological progress" -- Fukuyama never actually said he did -- but then goes on to argue that the progress we've seen is not enough, that it's slowing, stagnating. Thiel tackles the keystone of the thesis: How do we know we're stagnating? "If you look at technological progress during most of the 19th and 20th century, it brought significant disruption. ... In effect, over time labor was freed up to do more productive things." But he insists that's no longer the case. The evidence? Advancing inequality. True, he notes, technology is just part of the problem; the financialization of the economy and -- this is big, he says -- globalization also play major roles. Thiel eventually circles back to technology, again making a circumstantial argument. Look at industries like clean energy. They should create millions of jobs but they haven't. The reason: technological stagnation.

Thiel goes on to say a number of interesting things, notably that he thought "things worked better in the '50s and '60s." This is odd for a libertarian, because this was a period dominated by government funding for R&D, particularly from the military. Both Thiel and Cowen unabashedly share an enthusiasm for big efforts like the Concorde or the space program. And they view the failure or reduction of those projects as a further sign of stagnation. We no longer want to be inspired by great feats of science and engineering.

That points up the problem here. When we talk about technological progress, we talk about signs and bits of evidence; that's why this is a thesis not a fact. Innovation or progress eludes quantification; it can only be discerned through secondary economic measures: unemployment, inequality, lagging productivity (Cowen in the book obviously has gathered far more evidence than Thiel offers and unfolds his case with more nuance). And even that may look very different with a longer time horizon. Or it's a feel that things aren't as dynamic as they were in the '50s or the '20s -- periods most of us had no real experience of. Was the disruption brought on by cars replacing horses any greater than the various disruptions kicked off by advancing computer power or, say, the Internet? How do we compare the economy of the '50s with the dramatically different economy of today? And why should stagnation be identified solely with inequality? Isn't Fukuyama's point valid: that disruption brought on by technological innovation may leave large parts of the society, particularly the inadequately educated, behind? Look at how computers have changed the factory floor, the steel mill, media and entertainment, communication. In economic history, at least since the industrial revolution, disruption has often left behind broad swaths of society, from British agricultural workers to unionized workers in American manufacturing. And that "seems" to be accelerating, both because of globalization and the rapid diffusion of disruptive technologies. Thiel is a bright guy, but he has a tendency to bathe the past in a warm glow, in which disrupted workers are quickly absorbed by more productive uses or in which an entire nation cheers a fast plane or a race to the moon. There's nearly always a lag -- and it's one that often crushes an entire generation of folks who find themselves on the wrong side, beginning with the under-educated, the discriminated against, or the social misfits. The new productive jobs usually go to their children or grandchildren.

That said, Thiel and Cowen might well be right; we'll know some day. But that brings us back to the hazy line between optimism and pessimism. Again, let us consult the signs and portents, which is all we have. Today's papers feature two signs of unabashed hope on the technological front. In the Financial Times, Martin Wolf, hardly a man to lose himself in euphoria, examines the promise of hydraulic fracking and "a golden age of gas." Fracking was developed in the U.S. and in the '80s or '90s. Wolf carefully notes all the environmental hazards associated with it, and enumerates, in classic Wolfian style, five considerations that will determine its development. But fracking does change the energy equation, threatening, in Thiel's formulation, to give the game back to Simon. Then there are reviews here and here of "Abundance: The Future Is Better Than You Think" by Peter Diamandis and Steven Kotler, a book whose optimism outpaces Steven Pinker's recent "The Better Angels of Our Nature: Why Violence Has Declined." The title says it all. In Diamandis and Kotler's half-empty glass, they see, well, abundance. They also liberally toss around statistics and anecdote, and offer a catchy thesis: "Humanity is now entering a period of radical transformation where technology has the potential to significantly raise the basic standard of living for every man, woman and child on the planet."

OK, perhaps their cheer is a little overheated. Perhaps their evidence is a little sketchy; I haven't read the book. And since it's a prediction, it's no more testable or believable than Cowen and Thiel's stagnation thesis. But it is a sign of the times, another boost to our ability to look forward without grimacing. We shall see if it holds. - Robert Teitelman

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